Strategist Lee: This recent junk bond disturbance usually means bad things for stocks

Strategist Lee: This recent junk bond disturbance usually means bad things for stocks
Strategist Lee: This recent junk bond disturbance usually means bad things for stocks

Fundstrat's Tom Lee told clients the current move in high-yield bond prices represents a cautionary signal for the S&P 500, using history as a guide.

The strategist reiterated his call for a market pullback.

"In our recent commentary, we have alluded to the growing divergences between equities and other markets — for instance, the flattening long-term yield curve, the record high distribution of PE [private equity] … the reversal of Trump rally leaders, and the weakening of high-yield prices and liquidity," Lee wrote in a note entitled "High-yield and equities diverging: credit usually right" to clients Friday.

"In other words, relationships which reliably move in tandem with equities are diverging, but one of the key lessons (for us) in the past decade, is one can never 'tell the market' what to do."

Lee's year-end price target for the S&P 500 is 2,275, representing 4 percent downside to Thursday's close. The benchmark is up 6 percent this year through Thursday compared with SPDR Bloomberg Barclays High Yield Bond ETF's 1 percent return.

Lee noted junk bond yield spreads versus Treasury bonds have widened more than 60 basis points since late February after being in a downtrend. He cited how the S&P 500 declined 4 percent to 22 percent in the 13 instances when this has occurred since 2010. In addition, the strategist said high-yield bond fund outflows reached almost $6 billion in the past month.

In terms of specific industries, the strategist noted energy corporate debt has the second-best sector performance this year, but also the worst stock performance.

"In our view, this divergence favors energy equities," he wrote.

For investors who want to take advantage of his bullish call on the sector, here are four energy stocks Lee highlighted.

CNBC

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